China switches to higher-value goods

There follows a comment by me on Chinese economic development from the 11 December issue of Fund Strategy.

One of the few interesting things in Gordon Brown’s generally dull pre-Budget report speech was his reference to China. He started with some figures that will not be a surprise to anyone who follows the economic fortunes of the Asian giant: “China alone is manufacturing half the world’s computers, half the world’s clothes and more than half the world’s digital electronics, and this Christmas, more than 75% of children’s toys.”

He went on to recognise that China is increasingly competing on quality as well as quantity. As an indicator, Brown used the massive number of engineers and computer scientists graduating from Chinese universities.

The existence of this trend is underlined by a report from the Organisation for Economic Cooperation and Development, published last week. It shows that in absolute terms, China looks set to become the second-largest spender on research and development in the world. America is set to spend $330bn (£168bn), China $136bn and Japan $130bn. The EU15 – which includes Britain – looks set to spend a combined $230bn.

On other measures too China’s R&D; effort is increasing. As a proportion of GDP it increased from 0.6% in 1995 to more than 1.2% in 2004. China has the second-highest number of researchers in the world, at 926,000, compared with more than 1.3 million in America.

Another indication of China’s growing economic sophistication is its increasing concern with intellectual property rights. As Stephen Roach, chief economist at Morgan Stanley, wrote last week: “There is a key reason for this shift: Inasmuch as China’s economic prowess has moved rapidly up the value chain in recent years – from low-value-added items such as toys and textiles to increasingly high-valued-added products – there is a growing consensus forming within the Chinese leadership that IPR protection is now in its best interest.” (Morgan Stanley, Global Economic Forum, December 4, 2006).

When Hank Paulson, the US treasury secretary, leads a delegation to trade talks with China this week he will be aware of such shifts. America can no longer look down on China as a minor player in the world. For the rest of the world too it is necessary to grapple with the reality of a sophisticated, as well as large, China. Although China is still a developing nation, it is already playing a large role in shaping global economic and financial affairs.